Air T, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2019, compared with the periods ended September 30, 2018. The request metadata identifies “2018 Q2,” but the filing is for Air T’s second quarter of fiscal 2020.
Business Context
Air T is a diversified holding company operating in overnight air cargo, ground equipment sales, commercial jet engines and parts, printing equipment and maintenance, and corporate activities. On September 30, 2019, the Company sold Global Aviation Services, LLC (“GAS”), which is reported as discontinued operations.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Six Months Ended September 30 |
|---|---|---|
| Revenue | $50.7 million, up 24% | $97.9 million, up 6% |
| Operating income | $0.5 million versus $(0.9) million | $1.5 million versus $1.8 million |
| Income from continuing operations attributable to Air T stockholders | $(2.4) million | $(0.8) million |
| Net income attributable to Air T stockholders | $5.7 million versus $(1.3) million | $7.5 million versus $1.5 million |
| Operating margin | Approximately 0.9% | Approximately 1.5% |
| Cash flow from operations | $0.6 million, versus $14.9 million in the prior-year six-month period |
- Quarterly revenue growth was led by commercial jet engines and parts, up 67% to $17.8 million, and overnight air cargo, up 16% to $19.7 million. Ground equipment revenue was essentially flat at $12.7 million.
- Six-month revenue growth was led by ground equipment sales, up 30% to $25.0 million, and overnight air cargo, up 10% to $38.1 million. Commercial jet engine and parts revenue declined 10% to $34.1 million, primarily because four whole-engine sales totaling $17.4 million occurred in May 2018 and did not recur.
- The second-quarter continuing-operations loss attributable to Air T stockholders was $(0.80) per basic and diluted share. Six-month continuing-operations loss was $(0.30) per share.
- Net income included an $8.4 million after-tax gain on the GAS sale. GAS also recorded discontinued-operation losses of $0.2 million in the quarter and $0.1 million for the six months.
- Cash and cash equivalents were $27.4 million at September 30, 2019; cash, cash equivalents and restricted cash totaled $27.5 million. Working capital was approximately $43.0 million.
- Total debt was $75.7 million, or $75.4 million net of issuance costs, compared with $58.0 million at March 31, 2019. Current debt was $29.8 million and long-term debt was $45.5 million.
- Debt increased primarily from a $13.0 million Contrail term loan, issuance of $9.6 million of trust preferred securities, and other financing activity. The Company also received $5.4 million from warrant exercises.
- Inventories increased to $40.4 million from $27.5 million at March 31, 2019, driven principally by commercial jet engines and parts.
Material Changes Versus the Prior Comparable Period
- Quarterly operating results improved from an operating loss of $0.9 million to operating income of $0.5 million, primarily from stronger ground equipment and commercial jet engine and parts performance.
- Six-month operating income declined 19% to $1.5 million. Overnight air cargo profitability fell because of higher pilot salaries and headcount, while commercial jet engine and parts profitability declined because of lower sales and higher medical claims costs.
- Net non-operating expense increased to $2.9 million in the quarter and $0.3 million for the six months, reflecting higher interest expense and impairment charges.
- The Company recorded other-than-temporary impairment charges of $0.4 million in the quarter and $1.2 million for the six months on its Insignia Systems investment.
- The Company recognized a $4.5 million gain from settlement and dissolution of Delphax Canada and Delphax UK in the six-month period.
- Cash flow from continuing operations was negative $0.5 million for the six months, compared with $15.4 million of cash provided in the prior-year period. Increased receivables and inventories were significant uses of cash.
- The Company adopted ASC 842 lease accounting, recognizing approximately $7.2 million of right-of-use assets and $7.6 million of operating lease liabilities at September 30, 2019.
- A three-for-two stock split was effected on June 10, 2019; share and per-share information was retroactively adjusted.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that available capital resources, operating cash flow, cash balances, and other liquidity sources were expected to cover foreseeable requirements and contractual financing obligations due by September 30, 2020.
- Air T and AirCo revolving credit facilities mature on February 28, 2020 following extensions executed on November 8, 2019. The Company stated that it is seeking refinancing, but there is no assurance that refinancing will be completed or obtained on favorable terms.
- The Company’s MBT credit agreement includes financial covenants, including a 1.25 debt-service-coverage ratio measured at March 31. Management indicated that compliance is not assured and that it may seek a waiver or take other actions if necessary.
- Ground equipment sales are seasonal, with revenues and operating income generally lower in the first and fourth fiscal quarters.
- The Company is exposed to variable interest-rate risk. Interest-rate swaps hedge portions of the variable-rate debt, but the swaps had a liability fair value of approximately $0.6 million at September 30, 2019.
- Contrail’s redeemable non-controlling interest had a carrying value of $6.0 million and may be subject to a seller put beginning July 18, 2021.
- The GAS sale had a stated purchase price of $21 million and includes a potential $4 million earn-out tied to performance through March 31, 2020. The reported gain remains subject to final settlement, transaction costs, and working-capital adjustments.
- On November 8, 2019, the Company purchased a 19.9% interest in Cadillac Castings, Inc. for approximately $3.0 million. A Company director is an investor in an entity that increased its ownership of Cadillac in connection with the transaction.
Key Facts for Investors to Verify
- Reconcile reported net income with the $8.4 million after-tax GAS sale gain and assess normalized earnings from continuing operations.
- Review the near-term refinancing requirements for the Air T and AirCo revolvers due February 28, 2020.
- Assess compliance with the March 31 debt-service-coverage covenant and the consequences of any waiver or breach.
- Monitor working-capital intensity, particularly the increase in receivables and inventories and the sharp decline in operating cash flow.
- Evaluate the sustainability of commercial jet engine and parts revenue after the nonrecurring May 2018 whole-engine sales.
- Review the valuation and future performance of the Insignia investment following the $1.2 million impairment charge.
- Confirm the final GAS sale settlement and any earn-out proceeds.
- Consider the effect of higher debt, interest expense, lease liabilities, warrant obligations, and the Contrail redeemable non-controlling interest on future liquidity.